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JTC purchased call options on Flynn common shares on July 7, 2020, for $200 as a...

JTC purchased call options on Flynn common shares on July 7, 2020, for $200 as a speculative investment. The call options give JTC the right to buy 100 shares at a strike price of $20 each. The options expire on January 31, 2021.

The following data is observed through 2020:

Flynn Stock Price Option Time Value
July 7, 2020 $20 $200
September 30, 2020 $18 $150
December 31, 2020 $22 $90

a. At September 30, 2020, the options are on JTC's balance sheet at a value of ? Muliple Choice: ["$350", "$150", "$200", "$1,950"].

b. In the fourth quarter (October - December) of 2020, JTC records a loss in time value of? Muliple Choice: ["$150", "$90", "$110", "$60"].

c. At December 31, 2020, the options are on JTC's balance sheet at a value of? Muliple Choice: ["$260", "$350", "$460", "$490", "$200", "$290"].

Solutions

Expert Solution

Call option is purchased as speculative investment. So, it will be measured at fair value/ mark to market value on balance sheet.

Value of call option = Intrinsic value + Time Value,

Intrinsic value of call option = Max (Spot price - Strike price, 0)

Hence value of call option = Max (Spot price - Strike price, 0) + Time Value

a. September 30,2020: Spot price = $ 18 and Time value = $ 150

Option value on balance sheet = Max ($18 - $20,0)* number of shares + $ 150 = 0 + $ 150 = $ 150

b. Loss in time value = Time value as of September - time value as of December

                                     = $ 150 - $ 90 = $ 60

c. December 31,2020: Spot price = $ 22 and Time value = $ 90

Option value on balance sheet = Max ($22 - $20,0) * number of shares + $ 90

                                                        = $ 2 * 100 + $ 90 = $ 290

jeff jeffy answered 1 year ago
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